New York Court Upholds Racetrack VLT Law

New York's highest court upheld as legal the spread of video lottery terminals to racetracks in a ruling issued May 3, a major victory for the state's racing industry.

With the recent increase in VLT revenue to the racing industry, the decision by the Court of Appeals likely represents the last major hurdle for the New York Racing Association to begin its long-stalled VLT operation at Aqueduct.

The Court of Appeals rejected a challenge brought by gambling foes who argued VLTs are actually slot machines, and therefore banned by the state constitution. The plaintiffs, a group of religious and civic leaders, as well as two state lawmakers, also challenged the VLT revenue split that permits some of the gambling proceeds to go to purses and breed development.

But the high court, in the highly anticipated ruling, said VLTs are not slot machines, and that they meet the mandatory test of being a lottery game. The VLTs are run by the state lottery division and are hooked up to a central computer from which winning numbers are determined.

The court, in a majority decision written by Judge Carmen Beauchamp Ciparick, said "if the video lottery is a lottery, the statute providing for it is constitutional regardless of whether the terminals used to play the lottery also look like, or even meet the penal law definition, of slot machines."

The court also said the constitution is not so rigid so as to prevent modernization of lottery betting machines, even if they are made to resemble slots. "It is of no constitutional significance that the tickets are electronic instead of paper. The particular methods of conducting the lottery are subject to change with time," the court determined.

The ruling also backs the revised laws determining how racetracks are to be paid from VLT proceeds, as well as money for purses and breed development. "The revenue to be reinvested belongs to the racetracks in the first place," the court said and that it is "generally not for the courts to determine whether a particular vendors fee set by the legislature is reasonable."

The court also defended the VLT revenue-sharing provision for the racing industry. "While we can perhaps imagine a case where a fee was so excessive as to constituting nothing more than a flagrant end-run around the requirement that the net proceeds of the lottery be applied exclusively to education, the fee at issue here does not begin to approach that standard," the court ruling said.

The VLT law, as well as an expansion of Indian casinos and a new lottery game, were approved by lawmakers shortly after the 2001 terrorist attacks on the World Trade Center. Lawmakers and Gov. George Pataki at the time insisted the gambling spread was needed to bring more revenue to the cash-starved state. Besides the VLT provision, the court also upheld Indian gambling expansion and New York's entry into a multi-state lottery game.

In April, as part of the state budget, lawmakers approved changes to the VLT revenue split intended to deal with an earlier court ruling that said it was illegal to direct VLT proceeds to purses and breed development. Under previous law, 29% of VLT revenue, after payouts to bettors and the state, goes to tracks. A portion of that money, on a sliding scale, goes to purses and breed development.

Interestingly, the court's decision would appear to have made the legislature's VLT revenue-sharing fix unnecessary. Lawmakers took that route to deal with a mid-level appeals court ruling on the matter. But the high court made clear the earlier revenue-sharing deal, including awarding money for purses and breed development, was acceptable.

Under the new provision, tracks get 32% of the first $50 million in annual VLT revenue, 29% on the next $100 million, and 26% on anything above that amount. In addition, lawmakers added a "marketing and promotional" payment that would provide an additional 8% on the first $100 million in VLT revenue, and 5% on everything over that figure. For Aqueduct and Yonkers Raceway, the fund for marketing, promotion, and associated costs of VLT operations would be capped at 4% of all VLT revenue.

Money for purses and breed development would then come out of the track's VLT proceeds, subject to separate deals between tracks, horsemen, and breeders. Currently, VLT casinos are operational at Finger Lakes Gaming and Racetrack and three harness tracks--Buffalo Raceway, Monticello Raceway, and Saratoga Raceway.

The court's decision – upholding the earlier law that set specific revenue sharing levels for purses and breeding funds – appears to provide a stronger negotiating stance for horsemen and breeders as they negotiate with tracks over VLT splits. Both groups have strong ties at the state Capitol and could convince the legislators to undo the "fix" that was devised last month to give more VLT money to tracks without specifying an exact VLT share to purses and breeding accounts.

NYRA President Charles Hayward and representatives of the horsemen's organization at NYRA did not return calls for comment Tuesday.

But Barry Ostrager, the head of the New York Thoroughbred Breeders Inc. said he expects NYRA will want "to partner with the horsemen and breeders to have a synergistic, cooperative and happy outcome" over VLT splits. Asked if his group plans to go back to the Legislature in the next couple months to get the old VLT revenue sharing law back, Ostrager said, "If the NYRA agrees promply to a contract we won't. If they don't, we will."

"We have every hope and expectation that the NYRA, with which we've had a long and successful relationship," he added, "will honor the Legislature's intent and adhere to the original agreement that they made when they went with the breeders and horsemen to the Legislature and proposed to the Legislature the (VLT) percentages outline in the (original) legislation."

While the plaintiffs are talking about appealing the decision involving Indian casinos to the U.S. Supreme Court, they said further challenges to the VLT law are now over.

Bennett Liebman, head of a racing and wagering think tank at Albany Law School, said the decision does leave a key question remained unanswered: what is a legal lottery game. While the court said the racetrack VLT program is a lottery, and so therefore legal, it did not "really clarify what exactly a lottery means."

That could be important because tracks have been considering expanding their VLT offerings to include such games as video poker. "Would video poker, which combines both elements of chance and skill, be a lottery under this definition?" Liebman wondered.